There Is No Invisible Hand (Harvard Business Review)
http://blogs.hbr.org/cs/2012/04/there_is_no_invisible_hand.htmlby Jonathan Schlefer
One of the best-kept secrets in economics is that there is no case for the invisible hand. After more than a century trying to prove the opposite, economic theorists investigating the matter finally concluded in the 1970s that there is no reason to believe markets are led, as if by an invisible hand, to an optimal equilibrium or any equilibrium at all. But the message never got through to their supposedly practical colleagues who so eagerly push advice about almost anything. Most never even heard what the theorists said, or else resolutely ignored it.
Of course, the dynamic but turbulent history of capitalism belies any invisible hand. The financial crisis that erupted in 2008 and the debt crises threatening Europe are just the latest evidence. Having lived in Mexico in the wake of its 1994 crisis and studied its politics, I just saw the absence of any invisible hand as a practical fact. What shocked me, when I later delved into economic theory, was to discover that, at least on this matter, theory supports practical evidence.
Adam Smith suggested the invisible hand in an otherwise obscure passage in his Inquiry Into the Nature and Causes of the Wealth of Nations in 1776. He mentioned it only once in the book, while he repeatedly noted situations where "natural liberty" does not work. Let banks charge much more than 5% interest, and they will lend to "prodigals and projectors," precipitating bubbles and crashes. Let "people of the same trade" meet, and their conversation turns to "some contrivance to raise prices." Let market competition continue to drive the division of labor, and it produces workers as "stupid and ignorant as it is possible for a human creature to become."
In the 1870s, academic economists began seriously trying to build "general equilibrium" models to prove the existence of the invisible hand. They hoped to show that market trading among individuals, pursuing self-interest, and firms, maximizing profit, would lead an economy to a stable and optimal equilibrium.
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baldguy
(36,649 posts)PA Democrat
(13,225 posts)Alan Greenspan bet the well-being of the country based upon his belief in the invisble hand of the free market despite no proof that it actually existed.
First, those models assume that rewards depend only on absolute performance, but in the real world, payoffs are often tightly linked to relative performance. When a valuable new piece of information becomes available to the investment community, for example, the lions share of the gain goes to whoever trades on it first. For an individual firm like Goldman Sachs, it is thus completely rational to invest millions of dollars in computer systems that can execute stock trades even a few seconds faster than others. But rivals inevitably respond with similar investments. Taken together, these expenditures are wasteful in the same way that military arms races are.
A second problematic assumption of standard economic models is that people are properly attentive to all relevant costs and benefits, even those that are uncertain, or that occur in the distant future. In fact, most people focus on penalties and rewards that are both immediate and certain. Delayed or uncertain payoffs often get short shrift
http://www.nytimes.com/2009/09/13/business/economy/13view.html?_r=1
AdHocSolver
(2,561 posts)The Federal Reserve was (and still is) heavily involved in the banking and Wall Street scams to strip the middle class of its assets.
The Fed works for the welfare of the one percent, not for the public good.
The "invisible hand" was never pushed very much in economics classes (my major). That fairy tale was for children and peons.
What is useful to understand about economics is supply, demand, output, sales, the relationship to pricing and wages, and competition and monopolistic control.
Kablooie
(18,641 posts)But there probably is an equilibrium that it will tend to as in nature.
Once predators eat all the prey the predators start to die off, leaving the prey to multiply once again.
It's an equilibrium of sorts but an extremely painful and destructive one and a dream scenario for conservatives.